Overfed Celtic Tiger becomes cartoon cat

Economics: When economic historians come to tell the story of the Celtic Tiger, they will not treat it as a single, cohesive era. Not one, but two such animals roamed our land in those times, they will say.

As historians do, they will argue over precise dates. But most of them will agree that it was preceded by a gestation period of roughly six years (1987-1992) and was born in 1993.

Excluding 2005, for which full-year statistics are not yet available, the subsequent 12-year period should be split into two separate periods. The year 1999 is admittedly somewhat arbitrary but has the advantage of creating two periods of equal length. Let's call the period 1993-98 the Celtic Tiger. The period since then, 1999-2004, shares the genetic ancestry, the colour and prosperity of its predecessor, but it is different. Let's call it the Celtic Garfield.

After the dismal years between 1977 and 1987, a prolonged fiscal consolidation between 1987 and 1992 reduced the burden of interest payments. This laid the foundation for tax cuts in return for which wage moderation was secured by social partnership (whatever its present faults, let's not begrudge it its past successes). This was the infamous era of jobless growth when emigration was high and dole queues long.

And then it happened. After decades when it seemed things could only go wrong, everything went right in one glorious year - 1993. The United States, Germany and Britain - our three largest trading partners - emerged from recession.

In 1992 and for our own good we had been spat out of the Exchange Rate Mechanism, putting our exchange rate and monetary policy on a sane and manageable footing. So when we voted for the Maastricht treaty the following year, world investors were watching. As well as getting a crack at entering EMU, we secured a generous tranche of structural funds. Then the US high technology sector began to boom, taking our foreign direct investment with it thanks to years of spadework by the IDA Ireland. A vicious circle became a virtuous one and the Celtic Tiger was born.

Both periods have had similar growth rates. Between 1993 and 1998, GDP growth has averaged 7.6 per cent. Between 1999 and 2004 it averaged 7 per cent. One difference to note is that, at the end of the first period, unemployment was close to 10 per cent. By 2004 it had fallen to just over 4 per cent. But that is where the second period's advantages end.

Celtic Tiger growth was based on sustained competitiveness and a surge in exports and tourism. Unit labour costs grew by only 3.2 per cent between 1993 and 1998. Exports increased by a massive 128 per cent. This was dominated by multinational activity but indigenous exports performed creditably during the period. And an entirely indigenous industry - tourism - saw visitor numbers rise by 72 per cent.

Consumer prices rose by just 9.9 per cent over the five years and our current account balance was in surplus to the tune of 2.5 per cent of GDP, in average terms. Manufacturing employment also grew strongly and did not peak until 2001 when it exceeded 250,000 people.

The Garfield phase has been far more self-indulgent. Growth in the last six years has been driven far more by personal consumption and the purchase of cars. Levels of personal indebtedness have risen dramatically, as highlighted by the Central Bank's publication this week of its Financial Stability Report.

In contrast, the productive side of our economy has deteriorated. Exports have grown by merely 25 per cent over this period of similar length. And tourism numbers are up by only 7 per cent. Our current account has registered a deficit of around 0.7 per cent of GDP.

The causes of this deteriorating performance are evident from the growth in unit labour costs, which rose by 15.8 per cent in the period, as well as by trends in consumer prices, which have grown by 22.5 per cent.

Another difference between the two eras relates to the importance of construction. During the Tiger era, construction employment was around one-third of manufacturing employment. In the second era, construction employment grew to roughly equal manufacturing employment and now accounts for one-third of overall employment growth. This is justified by demographic trends and immigration pushing housing demand. But it is not a sustainable basis for growth. Once houses are built, some of the employment slack will be taken up by investment in public infrastructure. But this activity is less jobs-intensive.

It is also less productive. Last week Forfás held a very useful conference on the role of productivity in the economy. Most forecasters agree that economic productivity is declining. The reasons were elaborated upon at the conference, as were the policy solutions. The decline is happening because the so-called non-traded sector of our economy, incorporating the public sector and much of our services sector, is immune from the competitive pressures that force organisations and firms to become more productive and competitive.

Yet this sector is responsible for most of the price increases in our economy. This is driving up prices and wages and that is hurting more productive sectors.

This is happening as information technology is providing firms with huge opportunities to cut costs. To do so they must restructure. The Government must give firms the freedom to do this so that they can engage in a "race to the top" by increasing productivity.

What about the fallout of this for jobs? Governments must help workers to retrain - with generous tax incentives for retraining and life-long learning - and should ruthlessly enforce legislation against ageism in the workplace. In a full employment economy, we should not fear dynamism and change, we should embrace it.

The contrast between the two sides of our economy is not an indictment. An increase in consumption and construction is warranted. But it can't last forever. As globalisation intensifies, the challenge for our economy is to rediscover the lean and agile qualities of the 1990s. More Tiger, less Garfield.